Are payments for domestic microgeneration liable to income tax?

Here at YouGen we have been asked a few times recently whether you have to pay tax on the money you receive from generating renewable energy in the form of electricity and heat. The simple answer for domestic micro generators is ‘no’, as such schemes are designed to make such payments exempt from income tax. However it isn’t always this simple. The devil is in the detail when it comes to taxation rules and there are various technicalities which you need to note if you’re thinking about making money from your renewable energy.

It seems that the way in which energy is used as well as how much is exported to others is just as important as the nature of the generator themselves (i.e. domestic or commercial). Here we look over the UK Government guidelines on the two signature microgeneration subsidy schemes; the Feed-in-Tariff (FiT) or the Renewable Heat Incentive (RHI).

Feed–in-Tariff

The FiT is a UK Government scheme whereby homeowners and businesses are eligible for a payment based on the electricity they produce (generation tariff) and give back to the grid (export tariff) through microgeneration. This can be through solar PV, a wind turbine, hydro, micro CHP technology and many other methods. To read more about the FiT see our information page.

The FiT income you receive within domestic properties is designed to be exempt from income tax.

UK tax legislation (ITTOIA 2005 Section 782 - domestic microgeneration) states that no liability to income tax arises to an individual from the sale of electricity produced through microgeneration if:

a) the system is installed at or near domestic premises occupied by the individual, and

b) the individual intends that the amount of electricity generated by it will not significantly exceed the amount of electricity consumed in those premises.

This implies that homeowners who install renewable energy technologies such as solar PV are not liable to pay income tax on their export tariff (extra electricity sent back to the grid), assuming that they meet these conditions. However what is deemed as ‘significantly exceeding’ your consumption within your home is unfortunately not so clear. This is why it’s important to research different methods of microgeneration as well as monitoring your own energy consumption beforehand, so you know for sure how much of your own electricity you will end up exporting to the grid.

These exemptions don’t apply to rental properties (as they are not occupied by the landlord who is the FiT income recipient). They would also not include small or large businesses, who have to declare their FiT as taxable revenue as part of their economic activities.

The general rule of thumb seems to be income from the FiT is not taxable provided you are using the electricity generated yourself.

Renewable Heat Incentive

The Renewable Heat Incentive (RHI) has two separate schemes - Domestic and Non-Domestic. The Domestic RHI is a government financial incentive to promote the use of renewable heat within households. This includes heat produced by appliances such as a ground source heat pump or biomass pellet boilers (see a full list of eligible systems).

In a similar way to the FiT legislation, Government guidance states that if you’re using heat solely for personal domestic use, the payments you receive for the RHI aren’t chargeable to Income Tax.

However the situation becomes more complicated if RHI payments are received for both domestic and other uses (e.g. providing heat to neighbours in exchange for a fee). Here, the guidance states that the payment is liable to Income Tax, because you’re providing a service in connection with the heat you’re generating.

The tax exemption also does not apply to business use, as this comes under the remit of the non-domestic or commercial RHI, with all payments classed as taxable business income. However if you operate your own firm from within the home, the boundaries become a little more blurred. The guidelines state that payments are generally not liable to Income Tax, as long as the payments are deducted from the cost of heating before dedicating any of the cost to business use. So as you can see, although designed to be tax-free in a domestic setting, there are a number of caveats to watch out for if you’re receiving income from the RHI.

Summary

So as you can see there is more than appears at first sight when determining whether or not you are eligible to receive tax-free payments from one or both of the microgeneration schemes. It definitely pays off to do your research before you install renewable technology to establish what your tax position will be.